The Big Double Whammy

Jul 29, 2011

Article By: Scott Burns

The letter begins:

“Dear Scott Burns,

Pressure to cut Social Security and Medicare benefits as a means of trimming the federal deficit continues to grow in Washington, DC… and AARP urgently needs your immediate support to fight these efforts to balance the federal budget on the backs of America’s seniors.”

Actually, the letter is evidence that a financial crisis for some is a marketing opportunity for others. AARP, the mega-buck insurance marketing organization disguised as an affinity group— it gets 52 percent of its revenue from marketing agreements— was writing to raise senior angst and let members know how busy it is defending the benefits that will, in due course, bankrupt the country.

In case you haven’t picked up on it, I don’t like the AARP. As I am an official senior citizen, the organization may be my friend, but it is also the sworn enemy of my children, my grandchildren and every generation that will follow. It’s not a personal thing: The AARP has it in for your next generation, too.

But as much as I dislike AARP, it has a point. The formal budget deficits we face have relatively little to do with Social Security and Medicare, so putting them into the budget deal brou-ha-ha is misleading misbehavior from the usual miscreants, our elected representatives of both parties.

If you look at the most recent statements of the federal budget, you will find that the off-budget— the one that is largely devoted to Social Security and Medicare— is still nominally balanced. This is a fiction, of course, but the trust fund accounting feels good. The problem here is that the off-budget counts the interest on the Social Security and Medicare trust funds as part of its revenue. That interest isn’t cash. It’s just a bookkeeping entry from the Treasury. Basically, the Treasury is giving IOUs to cover the interest on its other IOUs.

The rubber meets the road when you talk about cash flow. Here are examples from the last two Trustees reports:

According to an obscure appendix that reconciles trust accounting with the actual operation of the federal budget, the two programs operated at a net cash deficit of $202.4 billion in 2009. In the same year they showed a trust fund surplus of $130.6 billion due to accrued interest. You can find this information in the 2010 report, on page 241.

The same reconciliation exercise in the 2011 report, page 225, shows the two programs operated at a net cash deficit of $289.5 billion while showing a trust fund surplus of $61.2 billion.

Even so, the big problem today isn’t Social Security or Medicare. It is the on-budget— the budget that covers the broad operation of our government exclusive of entitlement programs. In 2009 the on-budget deficit was $1,549.7 billion. That’s a whopping 7.65 times as much as the combined Social Security and Medicare cash deficits that year. The on budget deficit for 2010 was $1,370.5 billion. That’s 4.7 times the cash deficit for Social Security and Medicare that year.

Let me put the on-budget deficit in perspective. If you rank every year since 1930 and ask what years were highest in on-budget deficit as a percent of total economic output, 2011 would rank 5th. Only 1942, 1943, 1944 and 1945 had greater deficits. Some will recall there was a World War going on at the time.

This year spending in the on-budget amounts to 22 percent of GDP, well over typical tax collections, regardless of tax rates, of 18 to 19 percent of GDP over the last 50 years. Tax collections, however, are running at only 10.7 percent of GDP, well under normal. So the immediate problem isn’t Social Security or Medicare, it is everything else the government spends money on.

So why are the politicians talking so much about Social Security and Medicare?

They know that their current overspending has begun its long deferred, but seldom discussed, collision with the rising cash deficit in Social Security and Medicare. Call it the Big Double Whammy. That cash deficit is going to grow like mad over the next ten years as the boomers sign up for Social Security and Medicare.

What we’re watching is the twilight of politics as practiced of the last 70 years, the easy purchase of senior votes with promises of benefits that will be paid for by the unborn.

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